G.R. No. 208844 - F and S Velasco Co., Inc. vs. Madrid

Case Summary (G.R. No. 208844)

Factual Background

At incorporation, the incorporators included Francisco O. Velasco, Simona J. Velasco, Angela V. Madrid, Dr. Rommel L. Madrid, and Jose Saturnino O. Velasco. After the deaths of Simona and Francisco, Angela inherited their shares and controlled 70.82% of FSVCI’s 24,000 shares. As of May 11, 2009, Angela held 16,998 shares, Madrid held 1,000 shares, Rosina B. Velasco-Scribner held 6,000 shares, and Irwin J. Seva and Mercedez Sunico held one share each. Upon Angela’s death on September 20, 2009, Madrid, as spouse, executed an Affidavit of Self-Adjudication on October 8, 2009, and thereafter called a Special Stockholders’ and Re-Organizational Meeting for November 18, 2009. On November 10, 2009, Madrid executed deeds of assignment transferring one share each to Vitaliano B. Ricafort and to Danao, Labalan, and Arimado (the Madrid Group). Meanwhile, Seva, acting as corporate secretary, called an Emergency Meeting on November 6, 2009 attended by Saturnino, Seva, and Sunico (the Saturnino Group), at which Saturnino was recognized as a director and elected president and Scribner elected vice-president. Notwithstanding the November 6 meeting, the Madrid Group proceeded with the November 18 meeting and reorganized the board and officers in their favor.

Trial Court Proceedings

The Saturnino Group filed a petition for declaration of nullity of corporate election with preliminary injunction and temporary restraining order before the RTC, which denied the TRO. The Madrid Group answered with compulsory counterclaims and sought appointment of a management committee, which the RTC denied by order dated January 12, 2010. In a Decision dated March 3, 2010, the RTC declared both the November 6 and November 18, 2009 meetings null and void. The RTC found the November 6 meeting invalid for lack of quorum and for effectively increasing the number of directors beyond the Articles of Incorporation by recognizing Saturnino as an additional director. The RTC ruled the November 18 meeting invalid because Madrid had only an equitable right to Angela’s shares pending probate, and therefore could not exercise the incidents of ownership such as calling meetings or voting.

Court of Appeals Ruling

On appeal, the Court of Appeals modified the RTC decision in a Decision dated March 1, 2013 by declaring the November 18, 2009 meeting valid and by remanding to the RTC with directions to appoint or constitute a management committee to take over corporate affairs. The CA held that Madrid’s Affidavit of Self-Adjudication conferred ownership of Angela’s 70.82% shares, resulting in 74.98% total ownership; that Madrid complied with registration requirements through inclusion in FSVCI’s General Information Sheet filed with the SEC; and that the resolutions adopted at the November 18 meeting therefore bound the corporation. The CA further ordered a management committee on findings of persisting conflict between factions, allegations of embezzlement, and imminent danger of dissipation and paralysis of corporate operations. The Saturnino Group’s motion for reconsideration was denied in the CA Resolution dated August 7, 2013.

Issues Presented

The Supreme Court framed two core issues: whether the CA correctly ruled that the November 18, 2009 meeting called by Dr. Rommel L. Madrid was legal and valid; and whether the CA correctly ordered the appointment or constitution of a management committee to take over the corporate and business affairs of FSVCI.

The Parties’ Contentions

The Madrid Group contended that Madrid became the controlling stockholder by virtue of his affidavit and related proceedings, that the transfer was reflected in the corporation’s General Information Sheet filed with the SEC, and that the November 18 meeting was therefore valid. The Saturnino Group contended that the November 6 meeting was valid or should stand, that transfers of shares require registration in the corporate Stock and Transfer Book to bind the corporation, and that neither the affidavit nor a GIS filing sufficed to confer the incidents of stock ownership necessary to call and hold a valid stockholders’ meeting. Both sides alleged corporate mismanagement and improprieties, which formed the CA’s basis for ordering a management committee.

Supreme Court Ruling and Disposition

The petition was partly granted. The Supreme Court reversed and set aside the CA Decision dated March 1, 2013 and the CA Resolution dated August 7, 2013. The Court declared the Special Stockholders’ and Re-Organizational Meeting held on November 18, 2009 null and void. The Court dissolved the Management Committee constituted pursuant to the CA decision and ordered the reconstitution of the Board of Directors as it was immediately prior to Angela V. Madrid’s death, consisting of Rosina B. Velasco-Scribner, Irwin J. Seva, Mercedez Sunico, and Dr. Rommel L. Madrid. The reconstituted board was ordered to fill the vacancy left by Angela and to act in a hold-over capacity until successors were elected and qualified in accordance with prevailing law.

Legal Reasoning and Authorities

The Court recognized that subsequent proceedings in the estate case in RTC-Makati Branch 59 and the dismissal of further appellate remedies established Madrid as Angela’s sole heir and special administrator, and that Angela’s properties thereby transferred to him. However, the Court emphasized that under Section 63 of the Corporation Code, transfers of shares are not effective against the corporation until recorded in its books, and under Section 74 of the Corporation Code the controlling record is the Stock and Transfer Book. The Court relied on Batangas Laguna Tayabas Bus Co., Inc. v. Bitanga and Lao v. Lao for the proposition that inclusion in a General Information Sheet filed with the SEC does not suffice to make one a stockholder of record for purposes of voting or calling meetings, and that the corporate books control. Because the record did not show registration of Angela’s shares in FSVCI’s Stock and Transfer Book in Madrid’s name at the time he called and held the November 18 meeting, the Court concluded he could not exercise the incidents of ownership and thus the meeting and its resolutions were void.

Remedy on Management Committee

The Court reiterated that the appointment of a management committee is an extraordinary and drastic remedy to be exercised with care and only when the requisites under the Interim Rules are shown. Citing Section 1, Rule 9 of the Interim Rules of Procedure Governing Intra-Corporate Controversies and relevant jurisprudence, the Court stated that applicants must demonstrate both imminent danger of dissipation

Case Syllabus (G.R. No. 208844)

Parties and Procedural Posture

F & S Velasco Company, Inc. (FSVCI) was the corporate petitioner represented by petitioners Rosina B. Velasco-Scribner, Irwin J. Seva, Mercedez Sunico, and Jose Saturnino O. Velasco.
Dr. Rommel L. Madrid and his associates Peter Paul L. Danao, Manuel L. Arimado, and Maureen R. Labalan comprised the respondent group labeled the Madrid Group.
The petition for review on certiorari assailed the Court of Appeals Decision dated March 1, 2013 and Resolution dated August 7, 2013 in CA-G.R. SP No. 113279.
The challenged CA rulings affirmed in part and modified the March 3, 2010 Decision of the Regional Trial Court of Legazpi City, Branch 5 in SR-09-007 and ordered the appointment of a Management Committee.
The RTC originally declared null and void the November 6, 2009 and November 18, 2009 corporate meetings and denied the Madrid Group's application for a Management Committee.
The issues before the Court were whether the November 18, 2009 Special Stockholders' and Re-Organizational Meeting was valid and whether a Management Committee should be appointed.

Key Factual Allegations

Angela V. Madrid inherited a controlling 70.82% of FSVCI stock upon the deaths of Francisco and Simona Velasco.
On September 20, 2009, Angela died intestate and without issue, and on October 8, 2009 Dr. Rommel L. Madrid executed an Affidavit of Self-Adjudication covering Angela's estate.
Madrid called a Special Stockholders' and Re-Organizational Meeting for November 18, 2009 and executed deeds of assignment transferring one share each to several associates prior to the meeting.
On November 6, 2009 an emergency meeting called by Seva purportedly recognized Jose Saturnino O. Velasco as a board member and elected a new president and vice-president.
The November 18, 2009 meeting reorganized the board and elected Madrid and his associates to key corporate positions despite the November 6, 2009 actions by the Saturnino Group.
The Saturnino Group filed a petition for declaration of nullity of corporate election with preliminary injunction and TRO before the RTC, and the Madrid Group counterclaimed and sought appointment of a Management Committee.

Lower Court Rulings

The RTC, in its March 3, 2010 Decision, declared both the November 6, 2009 and November 18, 2009 meetings null and void and denied the Madrid Group's application for a Management Committee.
The RTC found the November 6, 2009 meeting lacked quorum and improperly increased the number of directors contrary to the Articles of Incorporation.
The RTC ruled Madrid had only an equitable claim over Angela's shares pending settlement of her estate and thus could not exercise majority rights at the November 18, 2009 meeting.
The Court of Appeals reversed the RTC insofar as it declared the November 18, 2009 meeting invalid and directed the RTC to appoint a Management Committee to manage FSVCI affairs.
The CA found that Madrid's Affidavit of Self-Adjudication and filing of a General Information Sheet with the SEC effectively registered his acquisition and conferred majority ownership for corporate purposes.
The CA's resolution denying reconsideration of its Decision was dated August 7, 2013, prompting this petition.

Statutory Framework

Section 63 of the Corporation Code governs certificates of stock and the validity of transfers as against the corporation and prescribes registration in the corporate books as requisite for effectiveness.
Section 74 of the Corporation Code prescribes the mandatory keeping of the Stock and Transfer Book and makes it the controlling record of ownership and transfers.
Section 26 of the Co